Donald Trump

Trump’s tax cut plan poses a new threat to China

A lower US corporate tax rate could prompt companies to pull out of China and set up shop across the Pacific, analysts say

PUBLISHED : Thursday, 27 April, 2017, 8:01pm
UPDATED : Thursday, 27 April, 2017, 8:13pm

A tax cut planned by US President Donald Trump will be a test for Beijing in managing its capital outflows and its troubled manufacturing sector.

The Trump administration’s tax proposal, including cutting the corporate tax rate to 15 per cent and providing a one-time repatriation tax rate for trillions of dollars in international earnings stashed overseas, is aimed at luring US firms to remit overseas profits home and even to bring such operations back to the United States.

Beijing is already worried about a capital exodus following the US Federal Reserve’s interest rate increases and a retreat by manufacturers to lower-cost countries in Asia and Africa. Lower taxes in the US could make the situation even worse, putting pressure on the central government to be more serious about tax cuts and friendlier to investors.

US tax changes, including possible tariffs on imports, would “lure more Chinese manufacturers to invest in the US and undermine the competitiveness of Chinese exports”, said Zhu Ning, deputy dean of Tsinghua University’s financial research institute. “China must speed up its economic transformation and give up its old growth model of relying on exports,” Zhu said.

While Trump hasn’t yet labelled China a currency manipulator or imposed tariffs on its imports, he is still trying to narrow the US trade deficit with China. As agreed at his meeting with President Xi Jinping in Florida this month, the two countries plan to negotiate on trade over the next few months.

Trump’s tax-cut plans also come at a time many US businesses are leaving China due to rising costs, fierce domestic competition and an intrusive state.

McDonald’s said in early 2017 that it would sell 80 per cent of its fast-food restaurants in Hong Kong and the mainland to a state-backed Chinese company and US private-equity firm Carlyle Group. And Seagate, the world’s biggest maker of hard drives, earlier this year closed down a factory in China.

A survey by the American Chamber of Commerce in China in late 2016 showed that one in four US businesses there had moved operations out of the country or planned to do so, citing rising costs and protectionism.

A significant tax cut for companies in the US could accelerate this exodus, according to Liu Li-gang, the chief China economist at Citigroup in Hong Kong.

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If Trump’s maximum 15 per cent corporate tax rate was approved by the US Congress, it could spark increased foreign investments into the US and a “re-shoring” of US businesses to “create a shock to the global and Chinese economy”, said Liu. “Maybe China will have to follow suit and cut its own domestic corporate tax.”

China has been promising to ease the tax burden for businesses, and claims it has already cut hundreds of billions of yuan in taxes. However, China’s tax revenues rose nearly 12 per cent in the first quarter of this year from a year ago.

Ding Shuang, chief China economist at Standard Chartered, said Trump’s new moves “may generate pressure on China to follow suit” and that the “importance of tax cuts” would be highlighted in domestic policy debates in Beijing.

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US companies parked at least US$2.6 trillion in profits overseas in 2015, according to an estimate by the US Congress’ Joint Committee on Taxation. Many US businesses with big overseas cash accounts, from Caterpillar to Apple, are also big investors in China.

On the other hand, thanks to China’s control of outbound remittances and investment, it would not be easy for US businesses to send large amounts of cash out of China even if they wanted to, according to analysts and economists.

Trump’s tax plans “will affect Europe more than Asia”, said Louis Kuijs, head of Asia analysis at Oxford Economics in Hong Kong. “For mainland China, simply because it’s so hard to move money in and out of China.”

In the long run, a lower tax environment would make it more attractive to do business in the US or invest there, Kuijs said. “Especially if you think about large US multinationals that have to make up their minds on whether to produce in the US, Mexico or China.”

Additional reporting by Sidney Leng